UAPF Pension Assets and Small-Company Shares: Why It Is Too Early

Several journalists have asked me to comment on the recent initiative to use UAPF funds to buy shares of small and medium-sized companies on the Kazakhstan Stock Exchange (KASE).

Let me take the points in order.

First, regulation of the UAPF's investment activity is the responsibility of the National Bank of Kazakhstan (NBK), not the government, and asking the government to dispose of pensioners' money is neither quite ethical nor appropriate. That is what the asset manager is for: it must decide where to invest on the basis of risk and return assessments. Questions about limits and the investment declaration should most likely be addressed to the NBK.

Second, shares are always the riskiest financial instrument, especially in Kazakhstan, and the UAPF's primary task is to preserve money, not to gamble with it for the sake of a dubious and uncertain return. That is why, if you look at the investment declaration, you will see that it mainly allows investment in government securities, second-tier banks and the quasi-public sector. No more than 5% seems to be left for the non-government sector, and from a risk standpoint it is better to direct that money to established large companies than to small companies with no history.

Third, shares in Kazakhstan are the least liquid financial instrument, and it will be very hard to sell them later, unlike bonds, which have a fixed maturity. The main reason is the absence of a stock market. And the problem is not only the lack of players but also the lack of a system of corporate regulation. Kazakhstan has no independent auditors, no independent appraisers and no independent exchange. So any investor buying shares in our country is buying, first of all, uncertainty and a host of risks, and only then returns.

Fourth, the newly minted issuers have no track record and are, in essence, start-ups, which is completely unacceptable for pension funds, which by definition cannot take on start-up risk. This is not a venture fund. To be able to invest in mid-sized companies, there must be a positive trading history on the exchange, in addition to transparent reporting.

Fifth, any reasonably competent financial analyst who examines mining start-ups, with their many technological and country risks, or who studies the oil equipment market and understands that, with the oil market in recession and Kazakhstan's WTO membership, even allowing for the devaluation, an unstable oil-production sector is hardly the best growth sector, will not put pension money into them. And that is without even analyzing individual company reports.

So I believe that we first need to develop the stock market and financial institutions (audit, appraisal and so on) and build a positive track record. Only then should we come to a decision on investing pensioners' money in the shares of medium-sized and small Kazakhstani companies.